Is The Depreciation Cost Of EV The Same As Fuel Vehicles?

Recent years have seen an increase in popularity of battery-operated vehicles, which are commonly known as electric vehicles, or EVs. They are an environment-friendly commute since they do not rely on petrol or diesel. Instead, it uses battery power that usually accounts for more than half of the cost of the vehicle. But, if you are wondering whether the depreciation cost of an EV will be similar to fuel vehicles, the simple answer is no. It is because EVs have batteries that make up for more than half of the cost of the vehicle.

What is Depreciation?

Depreciation refers to the reduction in the value of an asset over time due to factors such as wear and tear, aging, or obsolescence. It is commonly used in accounting to allocate the cost of tangible assets, like vehicles or machinery, over their useful life. Depreciation helps businesses and individuals account for the decreasing value of their assets, impacting financial statements, taxes, and the overall value assessment of the asset. In motor insurance, depreciation affects the claim amount, as it reduces the insured value of the vehicle when a claim is made for damages or theft.

How Average Car Depreciation Value is calculated?

The average car depreciation value is calculated based on the vehicle's age, mileage, brand, model, and condition. Typically, a car depreciates the most in the first few years of ownership, losing around 20-30% of its value in the first year alone. After that, it continues to depreciate, but at a slower rate. Here's how the calculation is generally done:

1. Initial Price: The car's price when it was new.
2. Annual Depreciation Rate: On average, cars lose about 15-20% of their value every year.
3. Vehicle Age: The number of years the car has been owned and used.
4. Mileage and Condition: Higher mileage and poor condition can increase the depreciation rate.

For example, if a car is worth $30,000 when new and the depreciation rate is 20% annually, it will lose $6,000 in the first year, making it worth $24,000 after one year.

Factors that Affect the Electric Cars Depreciation Cost

1. Battery Life and Condition: The performance and lifespan of the battery play a significant role in the value of an electric vehicle (EV). A deteriorating battery decreases the car's resale value.
2. Brand and Model: Well-known brands like Tesla tend to hold value better than lesser-known models. High-demand electric car brands may have slower depreciation.
3. Government Incentives: The availability of government incentives or rebates for new EVs may lower the resale price of used electric cars as they may be less attractive without these benefits.
4. Technological Advancements: Rapid advancements in EV technology, such as longer battery life or faster charging capabilities, can make older models depreciate faster.
5. Mileage: Just like traditional vehicles, electric cars also suffer depreciation with higher mileage. However, EVs generally experience less wear and tear compared to combustion engine vehicles, leading to potentially slower depreciation.
6. Market Demand: The demand for electric cars in the used market plays a significant role. With growing interest in environmentally friendly vehicles, demand for used EVs can slow depreciation.
7. Model Year: The age of the car is a significant factor, with newer models often having lower depreciation than older ones. However, EV depreciation can be steeper in the first few years, like with conventional vehicles.
8. Condition: The overall condition of the car, including the exterior, interior, and functionality, also impacts its resale value and depreciation.
9. Fuel Economy and Charging Infrastructure: EVs with better energy efficiency and access to convenient charging infrastructure tend to depreciate at a slower rate.

Considering these factors will help you understand how electric cars depreciate and how to manage their long-term value. On average, the lifespan of an internal combustion engine (ICE) is 10-15 years, whereas a battery, generally, lasts for 5 years at the most. Given the relatively shorter lifespan of an EV battery, an EV should depreciate much faster than a fuel-operated vehicle. However, the neutralising factor is the rise in the global demand for electric vehicles. Several countries around the world have imposed a ban on the sale of vehicles that operate on combustion engines by 2035, given their contribution to environmental problems across the world. Hence, it is quite difficult to determine the exact depreciation value of an EV that is being driven on Indian roads. As of now, in India, electrical vehicles are being depreciated at the same rate as conventional motor vehicles. The same is courtesy of the laid-out schedule for the same by the Insurance Regulatory and Development Authority of India (IRDAI). But several noted figures in the Indian Insurance industry argue that it should not be the case, given the battery's share in the overall cost of the EV and its relatively shorter lifespan. You can visit the official website of IRDAI for further details But, insurers are finding it hard to determine the correct depreciation date for battery-operated vehicles. It is due to the fact that the purchase of EVs is a trend that picked up steam only recently in India, and as of now, less than 2% of the vehicles that are being driven on Indian streets are EVs. Hence, it is believed that the car insurance companies, as well as the IRDAI, will be able to determine the depreciation rate for an EV after there are enough EVs on the roads of India to warrant an actuarial evaluation by its insurers. But, on the flip side, the stalwarts of the insurance industry believe that a particular aspect of the EVs could offset the loss of value due to the short lifespan of an EV battery to an extent. Since an EV has relatively few mechanical parts, the rate of wear and tear is slower as compared to that of a traditional motor vehicle. But, for now, it is too early to tell, given that the EV industry is currently at a nascent stage. In addition, insurers cannot deviate from the depreciation schedule which has been laid out by the regulator, the IRDAI, for traditional motor vehicles. You can visit the official website of IRDAI for further details However, experts believe that the EV industry will grow at a cumulative rate of 90% year on year and by the year 2030, the Indian EV market will grow into a $150 billion industry, as per an article on Business Today.

Conclusion

EVs are being depreciated like traditional motor vehicles in India right now, however, things may change after a few years. Given the structural differences in how both types of vehicles work, insurance companies are providing electrical vehicle insurance covers for relatively cost-effective premium amounts. Such policies cover damages to the battery and other parts of the EV as a result of manmade events or natural calamities. Hence, if you are making a conversion to electric car and getting an electric car insurance policy, this is something you should keep in mind. If you are someone who is looking for insurance cover for your electrical vehicle, why not take a look at the electrical vehicle insurance policy options that Bajaj Allianz has on offer. You can compare the various insurance cover options with the help of our premium calculator before, during or after you have made the conversion to the electric car of your choice. Take a look at them right away!

FAQs

Why is Insured Declared Value important when it comes to car insurance?

IDV determines the maximum payout in case of a total loss or theft. A higher IDV ensures more coverage but increases premiums, while a lower IDV results in reduced premium costs but potentially insufficient compensation.

What is the impact of mileage on electric car depreciation?

Higher mileage leads to more wear and tear, causing faster depreciation. However, EVs typically depreciate slower than traditional cars due to fewer mechanical components, even with higher mileage.

How much do EVs depreciate after 3 years?

EVs generally depreciate by 40%-50% in three years. Factors like model, battery condition, and market demand for used EVs influence the exact rate.

What is the depreciation rate for electric bike for income tax?

Electric bikes used for business can depreciate at 40% annually under income tax laws in India, depending on the vehicle's classification and use.

Is there a deduction for EV vehicles?

Yes, under Section 80EEB, individuals can claim up to ?1,50,000 on interest paid for loans on EVs. Government incentives also help reduce the initial cost. *Standard T&C Apply Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.